Every blessing ignored...

Canada's global role in Energy Security

Canada is blessed with abundant natural resources, Europe has hardly any.  Europe was until yesterday obsessed with carbon emissions and is now learning the hard way about the importance of energy security, food security and indeed security itself.  Can Canada learn from this and ensure our own self-reliance as well as leveraging our resources to support our allies? 

Energy security requires energy to be both available and affordable.  Ticking just one of these boxes is not enough.  Renewable energy requires an equivalent back-up generation capacity on stand-by for when the weather doesn’t show up.  If that back-up is natural gas there is a weakness in that it cannot easily be stored on-site in large quantities (unlike coal, oil or uranium).  Relying on neighbors, whether friendly or not, is poor policy.  Even friendly neighbors will prioritize their own needs over yours – the Line-5 dispute being a case in point.  Unfriendly neighbors should never be a key part of energy security.

Europe has experimented with this “Fatal Trifecta” of, reliance on renewables, reliance on natural gas and reliance on neighbors in recent years.

Gas flowed from Russia to Europe throughout the cold war and the subsequent cold peace.  The “rules-based world-order” and energy interdependence was supposed to have created an environment where war would be unthinkable.  Tragically, this vision crumbled overnight as Russian heavy armour rumbled into Ukraine.

The question is: what’s next?

Oil prices spiked over-night, surpassing the psychological barrier of $100/bbl.  However, it is worth remembering that oil traded at over $100/bbl from 2010-2014, which would be more like $140 in today’s money.  So, whilst this feels expensive, we can anticipate that significant price rises can be absorbed before they restrain global demand.

The price of oil reflects a continuous mismatch between supply and demand.  Even at 100 million barrels per day of consumption, small variations of +/- 1% can tip the balance and send the price shooting up or down.  Russia is the third largest producer of oil, and the second largest exporter in the world.  It is highly unlikely that western countries struggling to manage rapidly rising inflation will want to risk Russian exports of crude oil, something that would see the price spike.  President Putin may well have built this into his calculations.

Canada is the 4th largest producer and our oil exports (2.5% of global demand) help keep a lid on global oil prices.   Avoiding huge spikes in the oil price will help limit the worst effects of inflation.  Oil is not only critical in petrochemicals, but it is also critical for transport: 100% of aviation and bulk shipping rely on oil, and the vast majority of land transport uses diesel in trucks and trains. Whether we like it or not, the hidden price of oil is embedded in everything.

Gas is different.  Until the development of liquefaction in the last 20 years, gas could only be transported by pipeline.  Consequently, liquified natural gas (LNG) has become increasingly commoditized and can be shipped in giant super-refrigerated tankers.  Prior to the shale-drilling revolution in the USA, America was planning on importing natural gas.  The situation has inverted, and it is now the world’s largest producer and a very significant exporter.  A flotilla of natural gas from the USA has been supplying the overly tight European gas market throughout this winter.

Canada has huge gas resources, but no LNG export terminals and extreme difficulty building pipelines cross-country.  We are missing out on export revenues and crucially, we do not provide our allies in Europe with reliable alternatives to their legacy pipeline suppliers.

Energy security has many faces.  As a net-exporter, Canada has a form of independence, but energy independence only addresses the availability of energy.  In a global market it does not address energy affordability.  We can expect to see rising costs, not only at the pump, but across all goods and services.  Whilst we pray for the people of Ukraine, the global battle against inflation has only just begun.